The Advisors' Blog

– Broc Romanek, CompensationStandards.com

As Rep. Barney Frank gets set to have the House Financial Services Committee mark-up his “Corporate and Financial Institution Compensation Fairness Act of 2009” on Tuesday, it’s worth noting what is happening overseas, courtesy of the article below from DealBook (by way of BreakingViews.com):

Before the financial crunch, the battle between regulators and bankers used to be one-sided; both agreed that bankers generally knew best, Breakingviews says. Bonuses, for example, were an internal matter. Post-crisis, however, regulators want more say. Britain’s Financial Services Authority, run by Hector Sants, has just laid down a line — a tough one by its usual standards — on multiyear guaranteed bonuses.

In a letter sent to more than 40 chief executives, it suggested such practices “may be inconsistent” with its pending approach to remuneration, which is based on keeping rewards aligned with risk. Institutions based in Britain are not happy, especially with the idea that employment contracts signed as early as March, when the F.S.A. published its first consultation paper, could come under scrutiny, Breakingviews says. To them, the approach seems unfair and gets in the way of the high pay revival sweeping the industry. Even government-controlled banks, including Royal Bank of Scotland in Britain and Citigroup in the United States, are paying up for talent, the publication notes.

In theory, regulators could stop not only multiyear guarantees but also any reversion to old pay practices. The F.S.A. and its peers in the United States and elsewhere could decide that gargantuan pay packages were simply off the table, Breakingviews says. A few months ago, such a blanket decree, with a few exceptions, seemed plausible, it says. In practice, the mood has changed, the publication suggests. The exceptions could now become the rule, Breakingviews argues. When governments are turning a blind eye to the hiring practices of the banks under their control, regulators will have trouble being much tougher, it says.

The F.S.A. may still try, Breakingviews says. Banks would be foolish to ignore its letter completely or protest too loudly, the publication says. The regulator has the authority to levy fines or even to increase capital requirements for institutions it judges are careless about pay, it notes. But wily bankers can probably protect their rewards without direct confrontations, according to the publication. Better to cut back on egregious contract terms, while marshaling persuasive arguments about how bankers and traders are getting extra pay for keeping a particularly close eye on the risks they are taking, Breakingviews says.